ECONOMICS FOR THE IB DIPLOMA: EXAM PRACTICE PAPER

Paper 3 (HL only)

Question 3
* Note that Questions 1 and 2 appear in the Digital Coursebook.
Riverland has been experiencing balance of payments difficulties over a period of several years. It imports
most of its consumer electronics from nearby Mountainland. For decades, Riverland’s exports were roughly
in balance with its imports. Exports came from two specialised industries – fishing and lumber – but these
two industries have seen a major decline due to climate change, which caused damage to Riverland’s natural
resources. This, combined with Riverland’s rising hunger for consumer electronics, has created a significant
current account deficit. This has alarmed some economists who argue that if this persists, Riverland’s economy
could suffer.
Table 1 presents its balance of payments accounts for the year 2019. Note that the Rvl is Riverland’s currency.

1 Current account
2 Balance of trade in goods −17.0
3 Balance of trade in services −7.5
4 Income +2.5
5 Current transfers +5.7
6 Balance on current account
7 Capital account
8 Capital transfers +0.7
9 Transactions in non-produced, non-financial assets +1.2
10 Balance on capital account +1.9
11 Financial account
12 Foreign direct investment +4.5
13 Portfolio investment +1.7
14 Reserve assets
15 Official borrowing +4.7
16 Balance on financial account +14.4
Table 1: Balance of payments accounts for Riverland, 2019 (billions of Rvl)

a i Calculate the value of Reserve assets (row 14) in the balance of payments. [2 marks]
ii Calculate the Balance on current account (row 6), noting if this is in surplus or in deficit. [2 marks]
iii Using the concepts of debits and credits and the information in Table 1, explain how the
three accounts are related to each other. [4 marks]
iv Referring to items 4 (Income) and 5 (Current transfers) in Riverland’s balance of payments
accounts, outline what was likely to be larger in Riverland in 2019: GNI per capita or
GDP per capita. [2 marks]
v Draw an exchange rate diagram, and use it to show the effect of the change in Reserve
assets (row 14) on the value of the Rvl. [4 marks]
vi Riverland pegs (fixes) its currency against the US$ in order to avoid currency fluctuations.
Describe what would likely happen to the value of the Rvl if Riverland switched to a freely
floating exchange rate system. [2 marks]

1 Economics for the IB Diploma - Tragakes: Rock-Lacroix © Cambridge University Press 2021
 ECONOMICS FOR THE IB DIPLOMA: EXAM PRACTICE PAPER

1
Riverland’s GDP in 2019 was 117.3 billion Rvl, while its MPS + MPT + MPM = . The government
5
of Riverland would like to increase GDP by 1.5 billion Rvl, and decides to do so through an increase in

government spending.
vii 
Calculate the amount by which government spending should increase in order for the
government to achieve its GDP growth objective. [3 marks]

Population Part-time Full-time workers Actively looking Unemployment

workers for work rate
4,500,200 225,000 1,900,000 375,000 15%
Table 2: Riverland’s labour statistics in 2019

viii a Calculate the number of people in Riverland’s labour force. [2 marks]

b Using the information in the texts and data, and your knowledge of economics,
recommend a policy that the government of Riverland can implement to maintain
its fixed (pegged) exchange rate system. [10 marks]

2 Economics for the IB Diploma - Tragakes: Rock-Lacroix © Cambridge University Press 2021